Viacom and DirecTV Are Both Right, But DirecTV Is Righter

The fee dispute between Viacom and DirecTV that has seen the satellite service's 20 million subscribers lose access to MTV, Nickelodeon, Comedy Central and other channels has the makings of a long standoff, one in which each side, convinced of the justice of its case, refuses to yield. It probably won't work out that way, though, and that's too bad -- not just for those of us who love a good knock-down-drag-out, but for the consumers who will end up fronting the money that will smooth things over.

The thing is, both sides are right. DirecTV is right that it shouldn't have to pay more than it already does to carry Viacom's programming when ratings for its biggest channels have been slumping. Viacom is right that DirecTV can't afford to go without its shows, and entirely correct to use its leverage to extract the highest price it can.

But DirecTV has a couple other arguments at its disposal that tip the scales in its favor, rightness-wise. One is bundling.
The deeply consumer-unfriendly practice of forcing cable and satellite providers to carry, and pay for, little-watched channels if they want to have the top-tier ones is the reason pay TV costs as much as it does, as I've written before. When Viacom says that it's only asking for "a couple cents per channel per household" in additional fees, it's including channels like TeenNick, Logo and Palladia in that calculation.

Until fairly recently, distributors and programmers have been more or less in cahoots on bundling. But with pay TV growth slowing, the fault lines are starting to show. DirecTV knows that its lower price is what has allowed it to continue to add subscribers while terrestrial cable operators have been losing them. That's why the company has come out and demanded that Viacom give consumers the right to select channels a la carte.

"[I]f Viacom thinks their networks are worth a billion more, then you have to be able to select what’s most important in your own living room," the company says. "It's your money, so you should be able to decide." Kind of hard to argue with that.

Then there's the issue of Netflix, Hulu and other over-the-internet video distribution. DirecTV thinks video streaming is eating away at the ratings of channels like MTV and Comedy Central, and it has a point. After all, Netflix is already being watched more than any single cable channel. And deals with those online distributors are a major source of new revenues for Viacom, just as they are for Disney, Time Warner and other programmers.

In effect, DirecTV is saying to Viacom: You can charge us more, or you can undermine our business model, but undermining our business model while asking us to pay more is a little much. Again, it's a pretty solid argument.

Not a winning one, though. Viacom just has too much leverage. It claims its programming accounts for 20% of the viewing on DirecTV. A Dish Network subscriber who loses access to AMC can find a way to watch "Breaking Bad" -- the network has promised to stream the season premiere online for subscribers -- but a parent whose child is throwing a tantrum because "Dora the Explorer" and "SpongeBob SquarePants" have just vanished can't be expected to show the same level of patience. DirecTV will end up gritting its teeth and meeting Viacom more than halfway on price, and sooner than later.